$J.P. MORGAN NASDAQ EQUITY PREMIUM INCOME ETF(JEPQ)$ $Schwab US Dividend Equity ETF(SCHD)$
JEPQ VS SHCD
Today, I’ll be comparing SCHD and JepQ in terms of long-term growth potential, downside protection, and tax considerations. Let’s dive in! We'll start with a quick overview of what each fund is and how they are managed, just to set a baseline.
In my opinion, these two funds shouldn’t really be compared to one another since they’re so different, but a lot of people do, so let’s break it down. The main similarity is that both funds are income-focused investments, and they both primarily invest in U.S. stocks. But that’s pretty much where the similarities end.
There are three main differences I’ll highlight:
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Jep Q offers a significantly higher yield.
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That yield comes from different sources: SCHD generates income from high-dividend stocks, while Jep Q relies on covered calls.
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They focus on different types of stocks: SCHD targets value-oriented dividend payers like Ford, while Jep Q is growth-focused, primarily investing in tech-heavy, NASDAQ-like stocks.
We’ll look into these points in more detail as we compare the funds based on long-term growth, downside protection, and tax implications.
Long-Term Growth Analysis
Let’s start with long-term growth potential. If you only look at total return since Jep Q’s inception, you might conclude that Jep Q has higher growth potential. And just to clarify, when I say “total return,” that includes dividends reinvested, which is the same thing as total return (no need to distinguish between the two). For this video, I’ll focus on total return rather than price return, since Jep Q offers a 9.66% yield while SCHD only offers a 3.64% yield. Comparing them without considering dividends would be like comparing Apple to Tesla—not a fair comparison!
Now, looking at just the past two years for SCHD and JepQ doesn’t really provide a complete picture either, but that’s all the data we have for Jep Q at the moment. So, let’s get creative to analyze this. First, let’s break down what’s in each of these funds.
SCHD is based on the Dow Jones US Dividend 100 Index, which includes 100 companies that have paid dividends for at least 10 years and have strong enough balance sheets to continue doing so. The index uses a computer-driven formula to select companies based on various financial metrics. It primarily invests in the highest-yielding half of U.S. stocks, with limits to prevent concentration in any one company or sector. SCHD typically holds high-quality, well-established companies like Pfizer, Chevron, and Al Depo. The focus is on stability, lower volatility than the S&P 500, and healthy dividend yields, which have generally ranged from 2.5% to 4% over the past decade.
On the other hand, Jep Q starts with an actively managed portfolio that loosely tracks the NASDAQ 100. It’s not an exact replica, but it’s quite similar. Right now, more than 40% of its assets are in tech stocks, making it heavily focused on growth. These companies don’t pay much income, so Jep Q uses covered calls to generate income. I’ll dive into that covered call strategy shortly, but for now, let’s compare the underlying stocks in each fund.
SCHD Flashback
Looking back to SCHD’s inception, it’s been underperforming compared to QQQ, which tracks the NASDAQ 100 and is very similar to Jep Q’s holdings. Over the last 10 years, tech stocks have seen unprecedented growth, so this is where things get interesting. I’ve added American Funds Washington Mutual (shown in green) as a proxy for the kinds of companies SCHD invests in, allowing us to go back a bit further and get a broader view of performance.
It also targets blue-chip U.S. companies with a history of paying dividends, and its long-term return pattern closely mirrors that of Washington Mutual. Since Washington Mutual has been around for much longer, we can look back further in time. Compared to QQQ, which is often used as a benchmark for Jep Q's underlying holdings, Washington Mutual was consistently ahead for nearly two decades, even after the tech bubble burst. It wasn’t until recent years, during the latest tech rally, that QQQ took the lead.
If we start tracking from the peak of the tech bubble, Washington Mutual would still be ahead, even factoring in the recent tech surge. Over a nearly 25-year period, it's clear that SCHD could have a similar comeback against QQQ if the AI boom turns out to be a bubble—though I’m not predicting it will, as I believe AI is a bubble, but not nearly as inflated as the late ‘90s internet stocks. The tech rally over the last couple of years, while strong, doesn’t offer a full picture of what could happen in the future.
In a vacuum, I believe QQQ has more long-term upside potential than SCHD, as it carries a higher risk profile. But we’re not comparing SCHD to QQQ—just using QQQ as a baseline. The real comparison is between SCHD and Jep Q, which uses covered calls that typically cap monthly upside at around 2.5%. This limits Jep Q’s upside potential compared to QQQ. Since Jep Q’s inception, it has trailed QQQ by about 133%, but even that doesn’t give the full picture.
SCHD
jepq
This timeframe starts with a downturn, which actually benefited Jep Q, so if we begin looking from the start of 2023, Jep Q is behind by more than 25%. That said, this doesn’t fully reflect how things might unfold in the future. The past two years have been an unusually steady tech rally, with Jep Q capping its upside while still seeing positive returns from covered calls. The key is how the market behaves during volatile periods.
For example, imagine Jep Q sells calls that are 2.5% out of the money, earning around 1% in monthly income. In Scenario 1, the market rises by 3% for two months in a row. Jep Q's covered calls cap its upside at 2.5%, but the 1% income from the calls means the total return is 3.5% for the month. Over two months, the market has gained 6.09%, but Jep Q has done even better at 7.12%.
In Scenario 2, the market drops 5% in the first month, then rebounds 11.67% in the second. Even though the total return for both scenarios is the same—6.09% over two months—Jep Q lags behind because of its capped upside. While Jep Q loses less in the first month due to covered calls, it still limits its recovery in the second month. So, despite the same total market return, Jep Q underperforms.
Risk & Challenges
This capped upside, particularly in fast recoveries, can hurt Jep Q’s long-term growth potential. We’ve seen glimpses of this in Jep Q’s history, where it trailed behind QQQ. But recently, the steady tech rally has worked in Jep Q’s favor. While it’s tough to call, I’d give a slight edge to SCHD in terms of long-term upside, mainly because I don’t think tech will continue to outpace dividend stocks as much as it has recently.
For downside protection, it’s an interesting comparison since these funds take different approaches. JP Morgan aims to reduce volatility in Jep Q, but this is only relative to the NASDAQ 100, which is still a relatively volatile index. SCHD doesn’t explicitly aim to lower volatility, but its focus on high-quality dividend-paying companies with solid balance sheets and limited sector concentration generally results in lower volatility compared to the S&P 500.
The only downside protection strategy Jep Q has is through the covered calls, which have historically paid around 1% per month. This offers a cushion of roughly 1% in a downturn, meaning if the NASDAQ is down 1% in a given month, Jep Q might remain roughly flat. However, in a larger downturn—say the NASDAQ is down 10%—Jep Q would likely fall by around 9%, providing limited downside protection.
SCHD Downside Protection
In most market downturns, higher-risk stocks like those in the NASDAQ tend to fall more than stable dividend-paying stocks, like those in SCHD. A good example of this was 2022, when SCHD held up much better than QQQ, even with covered call income added in. Although the rise in energy prices boosted SCHD’s performance that year, SCHD would likely perform better than Jep Q in most downturns, especially since Jep Q’s nearly 40% tech concentration makes it more vulnerable to sharp declines. For downside protection, I’d give the edge to SCHD.
When it comes to taxes, it’s not much of a contest. SCHD’s returns are primarily from dividends, which generally have favorable tax treatment compared to income from covered calls.
Stock Appreciation and Dividends
Stock appreciation and dividends from stocks are mostly considered qualified dividends, meaning they’re taxed at a favorable rate. Any capital gains from appreciation are taxed at the long-term capital gains rate as long as the stock is held for more than a year. So, for most people, the majority of SCHD’s gains will be taxed at a reduced rate, either as long-term capital gains or dividends, assuming no changes to tax laws and that you don’t sell early. It’s always a good idea to consult with a tax professional or check the IRS website for specifics, but as of January 2025, that should apply to most people.
On the other hand, Jep Q doesn’t generate much in the way of qualified dividends, since it mostly holds growth-oriented tech stocks that pay minimal dividends. Plus, it doesn’t have as much potential for long-term price appreciation because of its capped upside from covered calls. Instead, Jep Q’s main source of return comes from those covered calls. However, there’s a catch—rather than writing covered calls directly on an index, Jep Q uses equity-linked notes, which means a large portion of the income from covered calls will be taxed at your maximum tax bracket. These notes allow them to report the yield from the calls on their website, making it appear higher, but the income is far less tax-efficient compared to other covered call ETFs, or even compared to a simple equity ETF like CHD. When it comes to tax efficiency, CHD is the clear winner.
Conclusion
So, which is the better option? They’re quite different, and in my opinion, they’re not really direct alternatives to one another. But if I had to choose one for the long term, it would definitely be SCHD. I know many of you might look at the short-term performance of Jep Q, with its higher yield, and think that SCHD is a bad pick. I think that perspective is too short-sighted.
The past two years have been a great environment for tech, no doubt, but focusing solely on this period overlooks the reality that the next two years likely won’t resemble the last two years. In fact, it’s rare for the next two years to ever mirror the previous two in the markets. Markets are cyclical, which is why it’s important to stay diversified rather than putting all your eggs in one basket. I can’t predict exactly when the market will shift, but in my view, the kind of results we’ve seen from Jep Q over the last two years aren’t likely to happen again frequently. Investing in Jep Q today with that expectation might just be chasing past performance, which could leave many investors disappointed in the long run.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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